Unit Roots vs. Trend Stationary

Christiano, L. J. and M. Eichenbaum. 1990. "Unit Roots in Real Gnp: Do We Know, and Do We Care?" Carnegie-Rochester Conference Series on Public Policy

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Macroeconomists have traditionally viewed movements output as representing temporary fluctuations about a deterministic trend. According to this view, innovations to real gross national product (GNP) should have no impact on long-run forecasts of aggregate output. Increasingly, however, this view of aggregate fluctuations has been challenged, Following the provocative work of Nelson and Plosser (1982), numerous economists have argued that real GNP is best characterized as a stochastic process that does not revert to a deterministic trend path. Under these circumstances, innovations to real GNP should affect output forecasts into the indefinite future. In pursuing this interpretation of the data, various researchers have tried to measure the long-run response of real GNP to a shock. Estimates of this response are often referred to as the persistence of shocks to real GNP.
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